I hate to offer a view that is counter to what many people clearly believe but I have been trying (and failing) to understand the metrics behind the Facebook IPO. So I’ll lead with my chin.
The IPO offer price was $38 on May 18 (and rose to $42.05) creating a value of $104 billion, making Facebook the largest tech IPO and the third biggest in history. At close of business on May 21 the stock had dipped to $34.03, a drop of 11 per cent. Since then it’s gone lower. On May 21 the market cap $92.56 billion, almost $10billion wiped off the IPO valuation. That’s a lot of wonga over five days including a weekend.
There exists a lot of rancour surrounding the IPO pricing for a variety of reasons. One US commentator called social network sites shares as ‘muppet bait’. Nice.
General Motors didn’t help by pulling all of its advertising off Facebook last week, around $10m. The GM marketing head also pulled out of the Superbowl, talking about relevance in terms of selling autos.
Turning to the latest BrandZ report, out around the same time as the Facebook IPO, it’s interesting to think through the nature of the most valuable global brands and why they are where they are. In the FT pull out section on BrandZ ( May 22) the editorial talks about “Companies that have invested in developing strong brands during the downturn have retained their value better and remain popular with consumers, despite hard times.”
That phrase got me thinking – companies that have invested in developing strong brands – and I looked through the top 20 brands according to the latest BrandZ. All of the top 20 do invest in their brands in a way we would understand, i.e. they have marketing activity on a large scale with some very notable examples such as Apple, Coca-Cola, Vodafone et al. They promote their products with very strong branded activity. Facebook doesn’t.
Market capitalisation of all companies is based on present and future earnings and Facebook can’t justify its IPO pricing on present earnings, it’s all about potential. That potential is a function of global reach combined with the potential for advertising revenue. However critics suggest the Facebook platform is not rich enough for the quality of content most advertisers demand which, in turn, will depress advertising revenues. They may be able to fix that but at the moment it is a barrier against the earnings justifying the market cap. Also the Facebook site wasn’t designed to work on smartphones so most ads on Facebook don’t work on mobiles; 50 per cent of Facebook users access the site via their mobiles. Ooops.
Returning to the point about marketing investment, I’m not aware of Facebook promoting its brand outside its own world. Given Facebook is a media channel in the making, I would have thought it would begin to promote itself via other channels like most media owners tend to do. Facebook relies on PR, which is generally very good, and word of mouth via their site. A good question for investors would be ‘what if the PR goes in the opposite direction?’ for whatever reason. Rosamund Urwin in the London Evening Standard said “Facebook is only a major privacy scandal away from a mass desertion.” By comparison Apple is #1 according to BrandZ and it has great products, fantastic stores and great advertising, all solid foundations for a strong brand. Its design ethos percolates through the entire operation.
I completely understand the phenomenon Facebook has become and I also completely get the global penetration, which could be a money-generating machine par excellence. However in the IPO document there was only a fleeting reference to advertising so I wonder if it is simply not really on the agenda. Following the IPO launch all the staff went back to work and there was one story about an all-nighter fuelled by pizza and beer, brainstorming techy ideas. I haven’t once read any reference to plans that might be focused on the aforementioned wonga.
Facebook has around 900 million users, which is around 12-13 per cent of the world’s population, one in eight! However Facebook revealed that its revenue per user annually was $4.34, roughly $4 billion. Google is worth twice as much as Facebook but with revenues six times greater. Call me stupid but I simply don’t get the maths and how these valuations can be so wildly apart. Same sector, same channel, same technology. Interestingly, in the BrandZ, Google’s brand value is $108 billion, Facebook’s is $33 billion, which seems closer to reality.
In the mists of Apple history Steve Jobs (pictured) lost his job (haha) to be replaced by a chap called Sculley from Pepsi who ultimately made a right balls-up of the company; Steve Jobs returned around 1996. The similarity could be that the creator of Facebook, Mark Zuckerberg, might also fall foul of the stock market when people start to get frustrated with the geeky playground outside San Francisco and force in a top suit from Wall Street.
I would guess the challenge for Mr Zuckerberg now (apart from what to do with all those billions) is how to stay in it for the long term and navigate the business intelligently to become a mature global player with strong revenues and returns for investors.
Quite a few long distance runners have done – Sorrell, Branson, Sugar, Gates, Jobs, Saatchi (Maurice version) et al. Maybe Mr Zuckerberg will grow in to a global leader, a regular at Davos.
I can already hear the cries of ‘dinosaur…’